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Contents
24.1.1 Extract from FRS102: Section 24.1 – 24.3.
24.1.2.1 Definition of government grant.
24.1.2.2 Treatment of research and development tax credits and similar assistance.
24.1.2.3 Governments assistance interest free loans.
24.2 Recognition and measurement.
24.2.1 Extract from FRS102: Section 24.3A – 24.5.
24.2.2.2.2 Fair value defined.
24.2.2.2.2.1 Fair value where non-cash items provided by way of grants.
24.2.2.3 Accounting policy choice and impact of change.
24.3.1 Extract from FRS102: Section 24.5B.
24.3.2.1 Definiton of performance related conditions.
24.3.2.2 Difference in treatment between revenue and capital grants.
24.4.1 Extract from FRS102: Section 24.5C – 24.5G.
24.4.2.1.1 Requirement to identify the type of grant.
24.4.2.3.2 Grants receivable/receivable towards the cost of non-depreciable assets).
24.4.2.3.3 Capital grant examples.
24.5 Classification in the profit and loss.
24.6.1 Extract from FRS102: Section 24.5A.
24.7.1 Extract from FRS102: Section 24.6 – 24.7.
24.7.2.2.1 Example using an accruals model.
24.7.2.2.2 Example using the performance model.
24.7.2.3 Notes to the financial statements.
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24.4 Accrual model
24.4.1 Extract from FRS102: Section 24.5C – 24.5G
24.5C An entity applying the accrual model shall classify grants either as a grant relating to revenue or a grant relating to assets
24.5D Grants relating to revenue shall be recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.
24.5E A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in income in the period in which it becomes receivable.
24.5F Grants relating to assets shall be recognised in income on a systematic basis over the expected useful life of the asset.
24.5G Where part of a grant relating to an asset is deferred it shall be recognised as deferred income and not deducted from the carrying amount of the asset.
24.4.2 OmniPro comment
24.4.2.1 Overview
As per Section 24.5D of FRS 102, the accruals model recognises the grant so as to match it with the costs incurred. If a grant is received for costs already incurred or for giving immediate support with related costs then under Section 24.5E of FRS 102, this is recognised immediately under the accruals model
24.4.2.1.1 Requirement to identify the type of grant
Under the accounts model and as stated in Section 24.5C of FRS 102 there is a requirement to identify whether the grant is a capital or a revenue grant. A revenue grant is a grant toward the cost of ordinary day to day activity (see 24.4.2.2). A capital grant is a grant given toward the cost of a fixed asset of some type. See (24.4.2.3)
24.4.2.2 Revenue grants
For revenue type grants such as training grants, the grant could be recognised in income in any of the following ways:
- Matched against direct training costs
- Taken over a period of time against salary for the employees expected to benefit from the training
- Taken systematically over a straight-line basis
- Taken when cash is received (if costs already incurred or no costs to be incurred)
As can be seen there will be judgement required as to which best meets the company requirements. It is vital that the company applies the policy chosen consistently and discloses this in the accounting policies.
Example 7: Accruals model – revenue grant
Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff for a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the employees must be kept on for a minimum of 3 years and the entity must create a non-distributable reserve equal to the amount of the grant to be received. The cost of the employees for each of the three years remain the same.
Under the accruals model, it may be appropriate to recognise the CU16,667 (CU50,000/3 yrs) in income each year so as to match the costs.
If we assume that the wage cost would increase by 10% per annum, then the release of the grant would be lower in year 1 than in year 2 and year 3 as higher costs are incurred in those years. Here the grant received would be recognised in proportion to the years cost over the total cost over the three years if this type of policy is chosen.
24.4.2.3 Capital grants
24.4.2.3.1 Analysis
As per Section 24.5F of FRS 102 grants relating to assets (i.e. capital grants) should be recognised is income on a systematic basis over the useful life of the asset.
24.4.2.3.2 Grants receivable/receivable towards the cost of non-depreciable assets)
Where grants are received towards the costs on non-depreciable assets such as land it would be reasonable to release this grant over the life of the building construction on it.
24.4.2.3.3 Capital grant examples
Example 8: Accruals model – revenue grant
Company A obtained a grant for the cost of relocation. This grant is repayable if the company moves within 3 years.
Under the accruals method, Company A would recognise the grant income in year one so as to match the costs charged for relocation.
If at the end of year one it was not reasonable to assume that the grant would be fully collectible or all conditions had been met then a receivable could not be recognised for the grant even though the costs were incurred. If in year 2, a grant was received, the full grant would be recognised in year 2. This would be included prospectively no prior year adjustment is required as it was a change in estimate. Based on facts and circumstances at the end of year 1 it was not reasonable the grant would be received.
Example 9: Accruals model – capital grant – depreciable asset
Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. The useful life of the plant itself is 50 years. Under the conditions of the grant the amount repayable if the 20-year condition is not met is reduced for every year the company stays in the factory.
In this case, the amount to be recognised each year will be based on the 50 year life as this is the life that the asset is depreciated over as required by Section 24.5F of FRS 102. Hence there is a matching of the depreciation charge on the property with amortisation of the grant. The total grant to be released each year is CU2,000 (CU100,000/50yrs). The journals required are:
| CU | CU | |
| Dr Bank | 100,000 | |
| Cr Deferred Revenue/Grant Liability | 100,000 |
Being journal to recognise receipt of the funds
| CU | CU | |
| Dr Accumulated Amortisation on Grant Liability | 2,000 | |
| Cr Grant Amortisation – Admin Expenses | 2,000 |
Being journal to recognise the release of the grant each year for 50 years.
Note the CU2,000 release per year should be included in the same line item in the profit and loss account as where the deprecation was charged.
If the above was a grant on land, which is non-depreciable, it is likely that this should be released over the useful life of the building constructed on it.
Example 10: Accruals model – capital grant (grant provided toward costs of construction with conditions that employment is maintained)
Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. As part of the grant they are required to maintain employment for 3 years.
In this particular case, judgement will have to be made as to whether in substance this is a capital grant or a revenue grant. All facts would have to be reviewed. However, given the large grant and the fact that it is principally towards the cost of the plant, in this particular case it would be treated as a capital grant and accounted for accordingly.
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Examples
Example 1: Recognition as a receivable.
Example 2: Performance related model – revenue grant.
Example 3: Performance related model – revenue grant – conditions.
Example 4: Performance related model – revenue grant – no conditions.
Example 5: Performance related model – capital grant -conditions.
Example 6: Performance related model – capital grant – no conditions.
Example 6A: Performance related model – capital grant – no conditions.
Example 7: Accruals model – revenue grant.
Example 8: Accruals model – revenue grant 8
Example 9: Accruals model – capital grant – depreciable asset.
Example 11: Repayment of grant – capital grant – accruals model.
Example 12: Repayment of grant – revenue grant – accruals model.
Example 13: Repayment of grant – capital grant – performance model.
Example 13A: Repayment of grant – capital grant – performance model.
Example 14: Repayment of grant – revenue grant – performance model.
Example 15: Repayment of grant – revenue grant – performance model.
Example 16: Extract from an accounting policy note in the financial statements.
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